How does a contractor buy materials tax-free for a construction project for a federal entity in Kansas?

Plain-English summary

A contractor doing construction work for a federal entity asked how to buy materials for the project without paying Kansas sales tax.

The exemption exists — but runs through a project exemption certificate. The Department quoted K.S.A. 79-3606(e), which exempts "all sales of tangible personal property or services purchased by a contractor for the erection, repair or enlargement of buildings or other projects for the government of the United States, its agencies or instrumentalities, which would be exempt from taxation if purchased directly." Critically, the statute requires that "[w]hen the government of the United States, its agencies or instrumentalities shall contract for the erection, repair, or enlargement of any building or other project, it shall obtain from the state and furnish to the contractor an exemption certificate for the project involved, and the contractor may purchase materials for incorporation in such project."

The mechanics. The contractor "shall furnish the number of such certificate[] to all suppliers," suppliers put the certificate number on their invoices, and on completion the contractor gives the federal entity "a sworn statement ... that all purchases so made were entitled to exemption." Invoices must be held five years and are subject to audit. Diverting certificate-purchased materials to another use without paying tax "shall be guilty of a misdemeanor," subject to the penalties in K.S.A. 79-3615(g).

The holding. "In order for a project to be exempt from Kansas retailers' sales and compensating tax the federal entity that is entering into a contract with your company must apply and have been granted a project exemption certificate." The Department enclosed the application form the federal entity must complete for each project.

Bottom line: the contractor cannot self-certify the exemption; the federal entity must obtain a project exemption certificate for each project, and only then can the contractor buy project materials tax-free.

What this means for you

The federal entity — not the contractor — obtains the certificate

The exemption depends on the United States agency or instrumentality applying for and being granted a project exemption certificate for the specific project. A contractor cannot claim the exemption on its own certificate.

One certificate per project

The Department enclosed the form "that must be completed by the federal entity for each project." The exemption is project-specific, so a new certificate is needed for each qualifying job.

Follow the certificate paperwork exactly

The contractor must give the certificate number to every supplier, have suppliers reference it on invoices, keep those invoices for five years for audit, and file a sworn completion statement with the federal entity.

Diversion is a crime

Using or disposing of certificate-purchased materials for any other purpose without paying the tax is a misdemeanor under the statute, carrying the penalties of K.S.A. 79-3615(g).

Common questions

Q: Can a contractor just claim the federal exemption itself?
A: No. The project is exempt only if the federal entity applies for and is granted a project exemption certificate; the contractor then buys under that certificate.

Q: What must the contractor do with the certificate?
A: Furnish the certificate number to all suppliers, ensure suppliers reference it on their invoices, keep the invoices five years, and give the federal entity a sworn completion statement.

Q: Is a new certificate needed for each job?
A: Yes. The federal entity must complete the application form for each project.

Q: What happens if certificate-purchased materials are used elsewhere?
A: Using or disposing of them for another purpose without paying tax is a misdemeanor subject to the penalties in K.S.A. 79-3615(g).

Citations and references

• K.S.A. 79-3606(e) — exempts a contractor's purchases of property or services for the erection, repair, or enlargement of buildings or projects for the United States, its agencies, or instrumentalities, provided the federal entity obtains and furnishes a project exemption certificate; sets out the supplier-invoice, five-year recordkeeping, sworn-completion, and audit requirements.
• K.S.A. 79-3615(g) — the penalty provision referenced by 79-3606(e) for misusing materials purchased under a project exemption certificate.
• K.A.R. 92-19-59 — the regulation authorizing private letter rulings; this ruling was issued under it and binds the Department only as to the requesting taxpayer.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-217

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

December 18, 1998

XXXXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX

Dear XXXXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated December 9, 1998.

Kansas law exempts from sales tax, "all sales of tangible personal property or services purchased by a contractor for the erection, repair or enlargement of buildings or other projects for the government of the United States, its agencies or instrumentalities, which would be exempt from taxation if purchased directly by the government of the United States, its agencies or instrumentalities. When the government of the United States, its agencies or instrumentalities shall contract for the erection, repair, or enlargement of any building or other project, it shall obtain from the state and furnish to the contractor an exemption certificate for the project involved, and the contractor may purchase materials for incorporation in such project. The contractor shall furnish the number of such certificates to all suppliers from whom such purchases are made, and such suppliers shall execute invoices covering the same bearing the number of such certificate. Upon completion of the project the contractor shall furnish to the government of the United States, its agencies or instrumentalities concerned a sworn statement, on a form to be provided by the director of taxation, that all purchases so made were entitled to exemption under this subsection. All invoices shall be held by the contractor for a period of five years and shall be subject to audit by the director of taxation. Any contractor or any agent, employee or subcontractor thereof, who shall use or otherwise dispose of any materials purchased under such a certificate for any purpose other than that for which such a certificate is issued without the payment of the sales or compensating tax otherwise imposed upon such materials, shall be guilty of a misdemeanor and, upon conviction therefor, shall be subject to the penalties provided for in subsection (g) of K.S.A. 79-3615 and amendment thereto." K.S.A. 79-3606(e).

In order for a project to be exempt from Kansas retailers’ sales and compensating tax the federal entity that is entering into a contract with your company must apply and have been granted a project exemption certificate. I have enclosed the form that must be completed by the federal entity for each project.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 12/18/1998 Date Modified: 10/10/2001

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